Analysis: Reliance's deep fossil fuel footprint gives its blue hydrogen push an edge

Reliance Industries is aiming to capitalize on its strong oil and gas presence by expanding its blue hydrogen footprint, a move that will help India's biggest refiner to strike a balance between pushing cost-effective clean energy while keeping focus on its traditional fossil fuel businesses.

Analysts said that while a dramatic recovery in crude oil and gas prices had created opportunities for the company's oil and gas businesses in both the upstream and downstream sectors, the company is keen to expand its presence in blue hydrogen until green hydrogen costs come down.

As oil demand and prices staged a recovery, Reliance saw its crude throughput in the October-December quarter rising 8.2% year on year to 19.7 million mt, while its refining margins have also improved sharply.

Analysts said the company's robust performance of its traditional oil and gas business would help to fund new energy initiatives.

"The focus of Reliance on its traditional oil and gas business will continue to remain. But as the energy scenario is set to change, Reliance will be increasingly focusing on oil-to-chemicals, blue hydrogen as well as green hydrogen. It is very well-positioned to do that with the right kind of assets," Ravinder Kumar Malhotra, former director general of the Federation of Indian Petroleum Industry, told S&P Global Platts.

First blue, then green

The company is looking to make a major push into blue hydrogen by repurposing some of its gasification assets, a step toward becoming a net carbon zero entity by 2035.

"In the interim, till the cost of green hydrogen comes down, Reliance can be the first mover to establish a hydrogen ecosystem with minimal incremental investment in India," the company said.

Reliance produces syngas and grey hydrogen from petcoke. Blue hydrogen is produced from natural gas by eliminating carbon dioxide emissions through capturing and storing the emitted carbon.

"The syngas will be used to produce hydrogen along with carbon capture and sequestration. The blue hydrogen so produced will be supplied to Reliance's refineries to replace grey hydrogen and sold to third parties. The CO2 captured will be monetized via production of urea and synthetic fuels," Jefferies said in a recent research note on Reliance.

Reliance said that syngas had the potential to produce hydrogen at a competitive cost of $1.20-$1.50/kg.

Reliance in 2021 announced plans to develop the Dhirubhai Ambani Green Energy Giga Complex at its integrated refinery complex at Jamnagar in the western state of Gujarat.

Jamnagar, the world's biggest single-site integrated refinery complex, has two refineries that together can process low-grade crude and switch between fuels depending on prices. While the older refinery is a domestic-focused one, there is also a separate export-oriented refinery.

The Jamnagar complex, the main hub for Reliance's oil-to-chemicals business, has been envisaged to be the center of the company's new businesses of renewable energy and new materials, supporting its net-zero commitment.

Potential to draw investors

"The plan by Reliance to transition to renewables with battery energy storage systems to meet its electricity and steam demand, and its recently announced ambitions to become one of the biggest producers of blue hydrogen in the world by repurposing an existing plant at its Jamnagar facility, are steps in line with the company's pledge to become carbon neutral by 2035, but timely execution is the key here," said Shantanu Srivastava, Energy Finance Analyst at the Institute for Energy Economics and Financial Analysis.

"The blue hydrogen strategy is unlike other oil and gas majors across the world, which have focused more on green energy production rather than manufacturing. If done successfully, this step has the potential to unlock value for the proposed spinoff of the company's oil-to-chemicals business and can bring in marquee investors," he added.

That said, green hydrogen rather than blue should be the company's main thrust and a long-term strategy should entail transition from blue to green as commercial viability is achieved in the latter, analysts said.

"Blue hydrogen production can provide Reliance the first mover advantage. However, in India it makes more sense to directly go toward green hydrogen production instead of grey or blue hydrogen due to two important reasons," said Ankit Sachan, hydrogen analyst at S&P Global Platts Analytics.

"First, India imports around half of the natural gas, which may lead to higher hydrogen production costs. And secondly, India lacks large scale CO2 storage sites compared to other gas and oil producing countries. Moreover, CCS projects globally have missed the carbon capture targets as a result of lower technological readiness," he added.

Reliance plans to invest around $10 billion in the clean energy business and aims to become carbon neutral by 2035. It identifies hydrogen as a major future clean energy fuel and aims to bring hydrogen costs to $1/kg within a decade.